Submitted by Edward Harrison of Credit Writedowns.
This post is from Niels Jensen of Absolute Return Partners. I have featured his monthly newsletter a number of times on Credit Writedowns (here’s the link to the last one, hilarious title). Jensen is very good.
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In this particular article, he makes a well-argued case for deflation over inflation as the likely long-term outcome. I express some of the finer points differently, but come to similar conclusions. The scenario I see is a low-growth muddle through (see the section labelled “Scylla and Charybdis” in my post, “Central banks will face a Scylla and Charybdis flation challenge for years”). Also, note that he is not talking about a sustained recovery at all, while I expect a fake recovery in 3-9 months.
The central question here is: "But what actually happens when credit is destroyed at a faster rate than our central banks can print money?"
Here is the post. Enjoy.
The Absolute Return Letter, July 2009
“You can’t beat deflation in a credit-based system.”-Robert Prechter
The great debate
As investors we are faced with the consequences of our decisions every single day; however, as my old mentor at Goldman Sachs frequently reminded me, in your life time, you won’t have to get more than a handful of key decisions correct – everything else is just noise. One of those defining moments came about in August 1979 when inflation was out of control and global stock markets were being punished. Paul Volcker was handed the keys to the executive office at the Fed. The rest is history.
Now, fast forward to July 2009 and we (and that includes you, dear reader!) are faced with another one of those ‘make or break’ decisions which will effectively determine returns over the next many years. The question is a very simple one:
Are we facing a deflationary spiral[1] or will the monetary and fiscal stimulus ultimately create (hyper) inflation?
Unfortunately, the answer is less straightforward. There is no question that, in a cash based economy, printing money (or ‘quantitative easing’ as it is named these days) is inflationary. But what actually happens when credit is destroyed at a faster rate than our central banks can print money?
A Story within the Story
Following the collapse of the biggest credit bubble in history, there has been no shortage of finger pointing and the hedge fund industry, which has always had an uncanny ability to be at the wrong place at the wrong time, has yet again been at the centre of attention. And politicians, keen to divert attention away from themselves as the true culprits of the crisis through years of regulatory neglect, have been quick at picking up the baton. Admittedly, the hedge fund industry is guilty of many stupid things over the years, but blaming it for the credit crisis is beyond pathetic and the suggestion that increased regulation of the hedge fund industry is going to prevent future crises is outrageously naïve.
If you prohibit private investors from investing in hedge funds which on average use 1.5-2 times leverage but permit the same investors to invest in banks which use 25 times leverage and which are for all intents and purposes bankrupt, then you either don’t understand the world of finance or you don’t want to understand. Shame on those who fall for cheap tactics.
Let’s begin by setting the macro-economic frame for the discussion. I have been quite bearish for a while, suspecting that the growing optimism which has characterised the last few months would eventually fade again as reality began to sink in that this is no ordinary recession and that ‘less bad’ doesn’t necessarily translate into a quick recovery. I still believe there is a good chance of enjoying one, maybe two, positive quarters later this year or early next; however, a crisis of this magnitude doesn’t suddenly fade into obscurity, just because the economy no longer shrinks at an annual rate of 6-8%.
The return of the boom & bust
Going forward, not only will economic growth disappoint, but the economic cycles will become more volatile again (see chart 1) with several boom/bust cycles packed into the next couple of decades. This is a natural consequence of the Anglo-Saxon consumer-driven growth model having been bankrupted. Growing consumer spending over the past 30 years led to rapidly expanding service and financial sectors both of which will now contract for years to come as overcapacity forces players to downsize.
Chart 1: US GDP Growth Volatility
Source: Reserve Bank of Dallas
This will again lead to higher corporate earnings volatility which will almost certainly drive P/E ratios lower, making conditions even trickier for equity investors. At the bottom of every major bear market in the last 200 years, P/E ratios have been below 10. As you can see from chart 2 overleaf, few countries are there yet. The next decade is therefore not likely to be a ‘buy and hold’ market for equity investors. The combination of low economic growth and pressure on valuations will create severe headwinds. The most likely way to make money in equities will be through more active trading.
Japan all over again?
So now, two years into this crisis, where do we stand and where do we go from here? History offers limited guidance, as we have never experienced the bursting of a bubble of this magnitude before. The closest thing is the collapse of the Japanese credit bubble around 1990. As the Japanese have since learned, recovering from a deflated credit bubble is a long and very painful affair.
Governments and central banks on both sides of the Atlantic are pursuing a strategy of buying time, hoping that a recovery in economic conditions will allow our banking industry to re-build its capital base. The Japanese pursued a similar strategy back in the early 1990s. It failed miserably and set the country back many years in its recovery effort. Ironically, the Japanese approach was almost universally condemned as hopelessly inadequate. It is funny how you always know better how to fix other people’s problems than your own. A little bit like raising children, I suppose.
Chart 2: P/E Ratios in Various Countries
Another lesson learned from Japan is that once you get caught up in a deflationary spiral, it is exceedingly hard to escape from its grip. The Japanese authorities have used every trick in the book to reflate the economy over the past two decades. The results have been poor to say the least: Interest rates near zero (failed), quantitative easing (failed), public spending (failed), numerous attempts to drive down the value of the yen (failed); the list is long and makes for painful reading.
The liquidity trap
We are effectively caught in a liquidity trap. The Bank of England, the European Central Bank and the Federal Reserve have all flooded their banking system with enormous amounts of liquidity in recent months but what has happened? Instead of providing liquidity to private and corporate borrowers as the central banks would like to see, banks have taken the opportunity to repair their balance sheets. For quantitative easing to be inflationary it requires that the liquidity provided to the market by the central bank is put to work, i.e. lenders must lend and borrowers must borrow. If one or the other is not playing along, then inflation will not happen.
This is illustrated in chart 3 which measures the growth in the US monetary base less the growth in M2. As you can see, the broader measure of money supply (M2) cannot keep up with the growth in the liquidity provided by the Fed. In Europe the situation is broadly similar.
There is another way of assessing the inflationary risk. If one compares the total amount of credit destruction so far (about $14 trillion in the US alone) to the amount spent by the Treasury and the Fed on monetization and fiscal stimulus ($2 trillion), it is obvious that there is still a sizeable gap between the capital lost and the new capital provided[2].
The output gap
If we instead move our attention to the real economy, a similar picture emerges. One of the best leading indicators of inflation is the so-called output gap, which measures how much actual GDP is running below potential GDP (assuming full capacity utilisation). It is highly unlikely for inflation to accelerate during a period where the output gap is as high as it currently is (see chart 4). Theoretically, if you believe in a V-shaped recession, the output gap can be reduced significantly over a relatively short period of time, but that is not our central forecast for the next few years.
Chart 4: Output Gap & Capacity Utilization
The deflationary spiral
I can already hear some of you asking the perfectly valid question: How can you possibly suggest that deflation will prevail when commodity prices are likely to rise further as a result of seemingly endless demand from emerging economies? Won’t rising energy prices ensure a healthy dose of inflation, effectively protecting us from the evils of the deflationary spiral (see chart 6)?
Good question – counterintuitive answer:
Contrary to common belief, rising commodity prices can in fact be deflationary so long as demand for such commodities is relatively inelastic, which is usually the case for basic necessities such as heating oil, petrol, food, etc. The logic is the following: As commodity prices rise, money earmarked for other items goes towards meeting the higher commodity price and consumers are essentially forced to re-allocate their spending budget. This causes falling demand for discretionary items and can in extreme cases lead to deflation. We only have to go back to 2008 for the latest example of a commodity price induced deflationary cycle.
A price increase on a price inelastic commodity is effectively a tax hike. The only difference is that, in the case of the 2008 spike in energy prices, the money didn’t go towards plugging holes in the public finances but was instead spent on English football clubs (well, not all of it, but I am sure you get the point) which have become the latest ‘must have’ amongst the super-rich in the Middle East.
For all those reasons, I am becoming increasingly convinced that the ultimate outcome of this crisis will turn out to be deflation – not inflation. Inflation may eventually become a problem, but that is something to worry about several years from now. The Japanese have pursued an aggressive monetary and fiscal policy for almost 20 years now, and they are still nowhere.
Interest rates on the rise
So why are interest rates creeping up at the long end? Part of it is due to the sheer supply of government debt scheduled for the next few years which spooks many investors (including us). And the fact that the rising supply is accompanied by deteriorating credit quality is a factor as well. But countries such as Australia and Canada, which only suffer modest fiscal deficits, have experienced rising rates as well, so it cannot be the only explanation.
Maybe the answer is to be found in the safe haven argument. When much of the world was staring into the abyss back in Q4 last year, government bonds were considered one of the few safe assets around and that drove down yields. Now, with the appetite for risk on the increase again, money is flowing out of government bonds and into riskier assets.
Perhaps there are more inflationists out there than I thought. Several high profile investors have been quite vocal recently about the inevitability of inflation. Such statements made in public by some of the industry’s leading lights remind me of one of the oldest tricks in the book which I was introduced to many moons ago when I was still young and wet behind the ears. ‘Get long and get loud’ it is called; it is widely practised and only marginally immoral. Nevertheless, when famous investors make such statements, it affects markets.
Make sure you get it right
The point I really want to make is that the inflation v. deflation story is the single biggest investment story right now and being on the right side of that trade will effectively secure your investment returns for years to come. If I am wrong and inflation spikes, you want to load your portfolio with index linked government bonds (also known as TIPS for our American readers), gold and other commodities, commodity related stocks as well as property.
If deflation prevails, all you have to do is to look towards Japan and see what has done well over the past 20 years. Not much! You cannot even assume that bonds will do well. Recessions are bullish for long dated government bonds but a collapse of the entire credit system is not. The reason is simple – with the bursting of the credit bubble comes drastic monetary and fiscal action. Central banks print money and governments spend money as if there is no tomorrow, and all bets are off. Equities will do relatively poorly as will property prices. But equities will not go down in a straight line. The market will offer plenty of trading opportunities which must be taken advantage of, if you want to secure a decent return.
All in all, deflation is ugly and not conducive to attractive investment returns. It is also not what governments want and need right now. With a mountain of debt hitting the streets of Europe and America over the next few years, as the cost of fixing the credit and banking crisis is financed, one can make a strong case for rising inflation actually being the favoured outcome if you look at it from the government’s point of view. The problem, as the Japanese can attest to, is that deflation is excruciatingly difficult to get rid of, once it has become entrenched. I am in no doubt which of the two evils I would prefer, but we may not have the luxury of choosing our own destiny.
Focus on volatility trades
So where does all that leave us? Our good friend and business partner, John Mauldin, has just put the finishing touches to a new accredited letter which will be published in the next day or two. In his letter, John makes the point that markets are likely to remain volatile for quite a while yet. On a personal note I will add that if my worst fears are proven correct and we have to fight a bout of deflation, the authorities will have no choice but to try and provoke price increases through aggressive policy measures. Otherwise entire countries could be bankrupted as they suffocate in their own debt. Whether it will work is a different story.
Such a struggle for supremacy between deflationary and inflationary forces will only add to the volatility predicted by John and give rise to an investment environment which is very unlike the one we have seen during the past 20-30 years. You need strategies in your portfolio which thrive on volatility, and they are certainly not the same strategies as those held by most investors today.
We are currently preparing the launch of a new single manager fund which is designed to thrive on volatility. It is also operating in markets as far detached from the world of equities as you can imagine, so the correlation to equities will almost certainly be low. If you are based in Europe, Africa or Asia and want to learn more about this new product or if you wish to receive John’s letter[3] when it is published, just drop us a note and you will hear from us. In the meantime, join me and wish for a bit if inflation. It is clearly the lesser of two evils.
Niels C. Jensen
[1] See chart 5 for a definition.[2] http://seekingalpha.com/article/145904-hyperinflation-trade-looking-crowded
[3] If you have already signed up as an Accredited Investor on John Mauldin’s website, you will receive his new letter automatically.
24 comments
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Inflationists see the cycle much further along than it is. They see recovery just around the corner and with it inflation. I take the view that there are still lots of shoes left to drop, like CRE, continuing waves of foreclosures, waves of loan refinancings, US debt management, etc. and we are still on the way down.
The post touches on volatility but I think it misses how distorted and dysfunctional markets remain. We certainly have a liquidity trap but that does not mean that banks are just sitting on it. They are using it to speculate where and when they can. In my view, this is what has driven the sucker's market in stocks and the rise in commodity prices.
Reminds me a bit of the thesis of Steve Keen. See The Roving Cavaliers of Credit.
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
I think regardless of the economic fundamentals, the Fed/government can always produce inflation if they want it. But there are consequences of course. Will it really want inflation when the consequences of the cure are worse than the disease? To take an extreme example, they could just print money and pay off all American household debt. That would certainly stop deflation. But that would also cause the dollar to crash and end it status as the world's reserve currency. It might lead to the end of the US/China trade relationship, the end of globalization and a relative decline in the power of the US.
They might decide instead that a weak economy for 10 years is preferable to that. I don't know of any example in history of a nation that successfully ended a deflationary collapse by inflationary means. Does anybody else?
The missing part of the analysis is to assume that credit-money that was created and destroyed by financial institutions and the cash-money that is being created by the government operate identically and interchangeably in terms of the economy, in effects looking for a single variable predict inflation or deflation. The pattern of the may will be more important than the unified gauge of some broad monetary measurement.
I guess I am one of the few people that believes that Bernanke will accept deflation because I know that he is smart enough to know that hyperinflation is worse than deflation. It is best that he engineers a slow-roll deflation, much like Japan. Bernanke already tried everything in his play book. Hyperinflation would just destroy the Fed's (remaining) credibility and power.
Of course, many people on naked capitalism are smart bears not those "Austrian school inflationstas" that populate Seeking Alpha (with a few exceptions, of course). I do not see how delevering would take place without an increase in real wages. I guess my IQ is too low to find out a possible mechanism for real wages to increase. Bernanke can cause inflation, but it is unlikely that wage inflation will lead to increasing real wages, the reduced debt burden will be offset with larger expenses for energy.
A great piece. I am more confused than ever. Which door will it be?
I was was struck by the comment that credit had fallen by 14 T over two years. I thought the shadow/on balance sheet side was 22 T. Public bond market brought the total to 30T. (does not include Agency of Treasury paper). If that is close to correct it would imply that we lost half of our debt capacity. If that is the case the door marked with a D would be the right choice.
Jesse had a post a couple of weeks ago stating that its a fallacy that "the output gap will prevent inflation" and its also a fallacy that "debt destruction will require a deflationary outcome".
He also says "The difference between the Japan of the 1980s and the US of today could not be more stark."
http://jessescrossroadscafe.blogspot.com/2009/06/some-common-fallacies-about-inflation.html
I do agree with Mr. Jensen that for investors this is "‘make or break’ decisions which will effectively determine returns over the next many years."
While I'm an Austrian in the deflationary camp Jesse makes a sound argument for hyper-stagflation, so I reserve my right to change my opinion at any time.
I'm looking forward to comments about this and Jesse's post though as the messenger please don't attack me.
There is nothing logically amiss with this solid think-it-through piece by Neils Jensen; in that sense, it's a valuable read. At least one cavaet though: the case of Japan is not as valid a comparable as it would appear.
Japan acted _in isolation_ and furthermore in opposition to the rest of the global economy, trapped in its' own pity pit of deflation while the world experience a colossal credit metastizasion with neg real rates everywhere. Now, we have a synchronized downturn. One shouldn't assume that the same effects will come from a systemically broad situation even if it mimics in form the a previous systemically narrow outcome.
Furthermore, Japan pursued its strategy from an exceptionally large base of domestic savings, something which buffered it's domestic economy, and to a degree may have prevented flight from its currency. Indeed, Japan made good money on the carry trade, in effect exporting its credit capacity rather then investing that capacity domestically where fraudulently artificially high asset values continued to discourage domestic investment. Again, we have worldwide asset values declining at best and collapsing at worst from bubble levels.
Don't be surprised if deflation goes sideways. Or if several currencies blow up. What I'm saying is that systemically we have a different set of limiting parameters here, in 2009, even while the central set of conditions are broadly similar.
I'm in the mild-deflation/low-inflation camp and think a Japan-like scenario is the most likely. However, there are a couple of things to keep in mind.
America, and others in similar positions, will likely not experience anything as bad as Japan for two reasons.
First of all, Japan has poor demographics (aging population) and this is one reason their deflation is so strong. When the population starts retiring, they start consuming less, take on riskier activities (like buying a house with debt, etc). America is one of the few places with a growing population (partly due to immigration) so the deflationary pressures will be nothing like Japan.
Secondly, the credit bubble in Japan was far larger than America's. Contrary to what the inflationists or the strong deflationists claim, debt in America is nowhere near Japan's. Another problem Japan had was that their excesses was with the corporate sector, whereas in America it is the consumer. Given how the real estate and stock market bubbles in Japan were far bigger–for instance, the P/E ratio on Japanese equities hit around 60 which is far higher than even the 2000 dot-com peak–the corporate balance sheet got hit really hard.
Having said all that, I do think growth in America will be slow and follow a path similar to Japan. It's just that I don't think it will be as bad as Japan. I would be shocked if USA posts a real GDP growth of 1% (nominal of something like -1%) for a decade as Japan has. I am thinking that USA will post around 2% (real) for a decade, which is below the potential of around 3% but far above Japan's.
"First of all, Japan has poor demographics (aging population) and this is one reason their deflation is so strong. When the population starts retiring, they start consuming less, take on riskier activities (like buying a house with debt, etc). America is one of the few places with a growing population (partly due to immigration) so the deflationary pressures will be nothing like Japan.
"
Immigration drives wages down… that is deflation and it adds to employment.
Are we going to look at a far removed event near 20 years past for answers, different in so many respects vs similarity's to dig our selves out this hole, do we not use Japan's problem only because its the freshest/easiest parallel we have on the menu.
Skippy…We can do better than this surly.
The problem is sytem fragility. Inflation/Deflation arguments are cute but ultimately meaningless. The issue is : will there be capital flight out of the US Dollar? , will the political system remain stable? , will social harmony prevail?
Hyperinflation is NOT a fast rate of inflation. It is an entirely different phenomenon . It is laughable to point to "output gaps" and such to try to explain it away. Hyperinflation is a complete bteakdown of the System. This is the risk.
"The problem is sytem fragility. Inflation/Deflation arguments are cute but ultimately meaningless. The issue is : will there be capital flight out of the US Dollar? , will the political system remain stable? , will social harmony prevail?"
Flight to where??? Euro??? Sterling?? Yen???
I am sure they do not want a strong currency and currencies such as NOK, AUD, CAD might not be able to handle such an inflow.
Other emerging markets might not be so stable either.
In my previous comment, I meant to say immigration makes unemployment worse. Why should immigration be encourage in a zero-sum labor market?
Right – that is an accurate description of the Current situation. Nowhere else to run to – therefore the Dollar strengthens. My guess is the Dollar will strengthen further as stocks selloff in the immediate future.
That does not make me feel any better about the system fragility issue facing us in the medium term.
So – what might a system breakdown look like?
Markets become dysfunctional. Prices become so manipulated and artificial that they become meaningless.
There may in fact be an "official" exchange rate for the Dollar vs other currencies – but fewer and fewer places will actually accept dollars as payment around the world.
There may be a variety of restrictions on what one can do with one's dollars imposed by the govt. Restrictions on where you can keep it, how much you can move/withdraw. Wealth taxes on cash balances. Capital controls. etc etc.
Property prices may be very depresed – but no one will want to jump on the "bargains" because of unknown and potentially large ongoing property tax obligations.
That sort of thing.
To Continue on system breakdown symptoms:
The most sought after stable jobs become the govt jobs. having 'connections" become more important than having "money". People with connections are able to get their kids into good colleges and find them good paying govt jobs. Money – well just does't talk anymore. people with accumiulated wealth can't do much with it except gradually lose it to devaluations and taxes.
Is a situation like this Inflation or Deflation?
I just cant seem to stop!!
The govt embarks on big ambitious projects: end povert, stop global warming, change the axis of rotation of the earth etc etc.
basic infrastructure decays further even though the govt is spending huge sums to fix it – workers are overheard saying " They pretend to pay us, we pretend to work"
The "official" prices of food, energy etc are fixed by law at low affordable prices. However unless you have "connections" forget about getting that gas line to your house fixed.
Inflation or Deflation?
Mary had a little rat, a horny little runt, and every time that Mary bent down the rat ran up …..
Prose or Poetry?
Looking at the deflationary spiral diagram it seems to me that falling prices might not exactly be relevant. What is relevant is more probably falling margins and this implies that you can have a deflationary spiral where import prices rise and internal prices tend to stagnate leading to a mild price inflationary environment in a wider deflationary spiral. Compartflation as FTAlphaville puts occurs.
There is a another reason to expect prices to continue to rise and as explained in white paper “Toxic equity trading order flow on Wall Street” by Arnuk and Saluzzi displayed recently on zerohedge. This hints that recent innovations in the ETF world especially linked to commodities mean that quant trading programs can break the link between fundamentals of demand and prices for both the upside and downside. Lack of regulation and recent innovations in derivative based ETF’s and ETF’s in treasuries and the dollar will lead significantly increased volatility in commodties, currencies and interest rates. The result will be wild swings from deflation to stagflation as the elasticity in the wage price relationship is stretched first one way and then another as wall street searches for the short term rewards.
Final thoughts on this entirely hypothetical scenario of system breakdown:
Harsh new laws are passed on "prfiteering" and the unpatriotic hoarders of wealth. With huge popular support all patriotic citizens and their children have to do 2 years of social service.
Oh – you say you just want to get out- maybe start a new life in a nice south american village? Maybe if you have an uncle or brother-in-law with good connections – he can get you the increasingly valuable Exit Visa.
meanwhile economists are barred from using incendiary terms like inflation and deflation that impede the progress of the great leap forward.
I've been warning about "commodities-only inflation" for awhile. The price of raw materials rise but corporations have too much capacity and too little pricing power to raise the prices of finished goods, while the labor market remains soft so wages remain stagnant or fall. This is ruinous for individuals as well as for all firms not involved in extracting and selling raw materials.
Jensen's post adds to that by pointing out that not only can commodities inflation coexist with general deflation, it can make the general deflation worse by drawing away disposable income.
–RueTheDay
@rs – are you having fun?
Here is something for you to ponder:
The lobster is canibalistic. The lobster can also detatch a limb to evade a predator. It will regenerate that limb.
So the question is, how long can the lobster live via autocanibalism? Certainly it can't continue to eat itself forever.
Dear kackermann:
having pondered your infinite regress riddle – unless this is a trick question – I believe the answer is :
Until the chili sauce runs out.
Aki: "Immigration drives wages down… that is deflation and it adds to employment."
Immigration can be deflationary for wages but, speaking as a non-economist, it is not clear to me that it is deflationary for the economy.
Even if immigration drives down wages–this is still questionable given how, for example, American wages rose in the late 40's and 50's even though there was strong immigration (particularly from Italy and the like)–the extra bodies may provide additional demand. They may also improve productivity but it all depends on the details.
In contrast, if we had net emigration or declining population, overall demand will likely decline even if wages don't. I suspect that declining demand is a far more powerful deflationary force than the decline in wages from any immigration (part of the reason, obviously, is because immigration is only a small portion of the total labour.)
Brick: "Looking at the deflationary spiral diagram it seems to me that falling prices might not exactly be relevant. What is relevant is more probably falling margins and this implies that you can have a deflationary spiral where import prices rise and internal prices tend to stagnate leading to a mild price inflationary environment in a wider deflationary spiral. Compartflation as FTAlphaville puts occurs."
I'm not familiar with what FT Alphaville said (any link?) but when has this ever happened in real life?
I see a lot of people arguing seemingly contradictory things, such as calling for very high inflation of commodities while the whole economy is facing deflation, but has this happened in the past?
I'm just a newbie so maybe someone can refute my view but… Outside of war, I haven't seen any periods consisting of sizeable deflation which also saw big increases in commodity prices. Apart from 1990's Japan and the Great Depression, we had many periods of deflation in the 1800's and early 1900's (deflation is common under the gold or silver standards). My impression is that commodities, as well as assets such as stocks, fell during those deflationary periods.
Debt-deflation.
Illiquidity.
Insolvency.
The economy.
The financial system.
The monetary system.
When the monetary system is insolvent, the financial system becomes illiquid and there is debt-deflation in the economy.
The focus on illiquidity and debt-deflation is misplaced.
Focus on the debt-money system.
The only way to correct the illiquidity is to create more debts because in the debt-money system, ALL money MUST be created as a DEBT.
Liquidity is not possible when the people are not willing to take on any more debt and a debt-money system does not work in reverse.
Can a fallacious, unsustainable
monetary system be insolvent?
http://www.financialsense.com/fsu/editorials/2005/1212b.html
There is a pro-cyclical syndrome at play that goes far beyond the debt-deflation spiral depicted in this article.
Cascading cross-defaults is what you don't want to hear.
BNut, who is working on an exit strategy?